[PDF] Note The Bitcoin trader, AMLC 2016 - Anti Money Laundering Centre PDF note-the-bitcoin-trader-amlc-2017.pdf

download via their service, please see: https://blockchain info/wallet/#/ In addition, Blockchain is the name for the data structure behind the Bitcoin network (the

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[PDF] Note The Bitcoin trader, AMLC 2016 - Anti Money Laundering Centre

download via their service, please see: https://blockchain info/wallet/#/ In addition, Blockchain is the name for the data structure behind the Bitcoin network (the

The Bitcoin trader

a facilitating role in the cash out of criminal proceeds

Anti Money Laundering Centre

October 2016, De Bilt, the Netherlands

Introduction

In 1998, scientist David Chaum was the first person to attempt to combine encryption (cryptography)

with electronic currency. Bitcoin was the first real crypto-currency and was released for the first time

in January 2009. As of 2011, the interest in Bitcoin significantly increased. Given, among other things,

the anonymous nature of Bitcoin, Bitcoin became a popular means of payment on the dark web. Criminals, however, soon encountered a lack of anonymity in the cash out. The moment the Bitcoins were converted to an electronic legal tender, the anonymity could no longer be guaranteed. The Bitcoin trader began to provide in the need for anonymity by purchasing Bitcoins against cash at an

attractive commission fee. By doing so, the Bitcoin trader facilitates criminal customers and he could

be guilty of the offence of money laundering. This document describes the role of the Bitcoin trader as

facilitator in the cash out of criminal proceeds.

Methodology

The note 'The Bitcoin trader, a facilitating role in the cash out of criminal proceeds' is drawn up by the

AMLC based on literature study, interviews with experts as well as on the basis of information and experiences from criminal investigations whereby underlying crime has been established.

Reader's guide

Part 1 first of all provides general information on the phenomenon of Bitcoin. It focuses on Bitcoin in

general, the anonymity of Bitcoin, the link to the illegality with regard to Bitcoin and the so-called

'Bitcoin mixer'. Part 1 concludes with a description of the profile of a Bitcoin trader. Part 2 provides an

overview of the recognised money laundering indicators regarding the Bitcoin trader, the Bitcoin mixer and the customer of the Bitcoin trader.

Part 1 Bitcoin and the Bitcoin trader

What is Bitcoin?

Bitcoin is an independent payment system with its own virtual coin, enabling users to directly engage

in transactions with one another via internet without the intermediation of other parties, such as a bank. A Bitcoin is not made of nickel or silver, but consists of a small piece of encrypted computer code to which the market of supply and demand places a value in euros or another legal tender.

Bitcoins are not physically available but are digital units. As with euros, Bitcoins can also be divided

into smaller units, thus enabling smaller transactions

1. Bitcoins can be exchanged through the Bitcoin

network. This makes it possible for Bitcoins to be used as a means of payment to settle economic transactions (goods and services). Apart from Bitcoin, there are also other virtual coins such as Litecoin and Peercoin. Bitcoin is the largest in turnover and users.

How does Bitcoin work?

To be able to pay with Bitcoins or to receive Bitcoins, you first need a Bitcoin address. This Bitcoin

address is the public part of a key pair and can be shared with the trade partner. The private part (private key) of the key pair may not be shared and is to be stored with care. A Bitcoin address is comparable to a bank account number. A Bitcoin address has at least 27 and a maximum of 34 characters. In practice, transferring Bitcoins means you enter the Bitcoin address of the receiving party (the

payee), you fill in the amount of Bitcoins (the transaction amount) and click on 'send'. Next, all sorts

of cryptographic operations take place to realise the transaction. Once you have transferred the Bitcoins, this cannot be undone. Upon sending the transaction, the user has the possibility to pay a voluntary 'fee'. By paying a fee, a transaction will be verified sooner.

Figure 1 An example of a transfer of Bitcoins.2

1 The smallest amount is one Satoshi. One Bitcoin consists of one hundred million (100,000,00) Satoshi.

2 B.H.M. Custers, J.J. Oerlemans and R.L.D. Pool 'Ransomware, cryptoware en het witwassen van losgeld in Bitcoins'

['Ransomware, cryptoware and money laundering ransom money in Bitcoins', Strafblad [magazine] 2016 (2), 15. The wallet

shown in the figure is managed by the company Blockchain. Blockchain is the name of a popular Bitcoin wallet that you can

download via their service, please see: https://blockchain.info/wallet/#/. In addition, Blockchain is the name for the data

structure behind the Bitcoin network (the general ledger in which all transactions are recorded). Blockchain enables you to

validate transactions without a central authority, to check accounts and to set up a payments system as it were, without a

central authority but it being a decentralised system. Your Bitcoins are in your Bitcoin wallet. You can download a wallet via www.bitcoin.org among others. You can generate one or more Bitcoin addresses in the wallet. A Bitcoin address and a wallet are not linked to an identity or name. There are different types of Bitcoin wallets. The first version is the mobile wallet, an app on your mobile phone. Bitcoin Wallet is a well-known example. Second, is the software wallet, where the

wallet software is installed on a computer. An example of this is Bitcoin Core. Furthermore, there is

the online wallet, whereby you open an account with an online service. A frequently used online

service (web wallet) is Blockchain.info. There is also the hardware wallet, which stores the private key

in a separate, properly secured, hardware device. Finally, there is the paper wallet: you then have printed your private key and public key. An advantage of this is that it prevents your Bitcoins from

falling in the wrong hands (think of cybercriminals). On the side of disadvantages, you could lose it

and have no backup. 3 There are two types of wallets, dynamic wallets and static wallets. In the dynamic wallet, following

each transaction, a new Bitcoin address is made and stored in the wallet. A static wallet each time uses

the same Bitcoin address for the transactions. The transactions done with a dynamic wallet are consequently more difficult to follow.

How do you get your Bitcoins?

You can get Bitcoins in different ways:

• You earn Bitcoins through "mining" • You buy Bitcoins from exchangers, marketplaces (exchanges) or traders • A person pays you in Bitcoins for goods delivered or services provided

Mining

The Bitcoin has to be virtually "dug". Every day a certain quantity is released to people who dig up Bitcoins ("mining"). New Bitcoins are tangled up in extremely difficult to crack algorithms. This cracking is done by using computing power. These "miners" not only unlock new Bitcoins and add

these to the Bitcoin network, they also check Bitcoin transactions in the network. Anyone can mine by

purchasing the necessary hardware, relevant software and, as one of the possibilities, to register with

one of the mining pools. The number of Bitcoins you receive after your mining pool has dug up Bitcoins, depends on your contribution to the pool.

Purchase with cash or scriptural money

To buy, hold, sell and transfer Bitcoins, you use a wallet. The actual purchase of Bitcoins can take place by means of electronic money or cash. In order to purchase Bitcoins with electronic money, you need a credit in the form of a legal tender, for example a bank account number in euros with a bank 4 or online payment services such as PayPal.

With the use of your wallet and your credit you can buy Bitcoins. A first option is through a Bitcoin

exchange office. Bitcoin exchange offices buy and sell Bitcoins on their own account and risk. They quote purchase prices and selling prices against which Bitcoins can be bought from them and sold to them, respectively. Examples of Bitcoin exchange offices include Bitonic, Coinvert, BTCdirect and Happycoins. The exchange costs vary at Bitonic between 0.1 and 1.5% of the transaction amount. This is the percentage difference (spread/fee) between purchase /selling price and the reference price/ market value of a Bitcoin. BTCDirect charges a fixed fee/ premium of 2% which is incorporated in the spread. In both cases, a reimbursement for the payment processor is included in the spread. Usually there is a small network fee payable for miners.

3 For further information on the paper wallet and how to create this, please go to

4 Bitcoins can be purchased via, for example, an iDEAL transaction in euros. This is one of the easiest and cheapest ways of

getting Bitcoins. However, there will then be a link between the Bitcoin address (exchange) and the bank account (banking

institution) with associated identifying data. Apart from Bitcoin exchange offices, there are also Bitcoin marketplaces.

5 These are trade fairs where

parties can buy and sell Bitcoins between them. A marketplace is an intermediary, comparable to an online investment platform, that brings together supply and demand, provides a market (transactions, pricing) and stores the credits (money and Bitcoins) of the customers. For these marketplaces, also known as exchanges, you generally have to register and in some cases also provide identifying

personal details. In many cases, this is done through derived identification by transferring an amount

on the account of the exchange. Popular Bitcoin exchanges include Kraken, CleverCoin (now part of Kraken) and Bitstamp. On all

transactions from Bitcoin to euro and vice versa that the exchange facilitates, Kraken charges a fee of

0.26% and BitStamp a fee of 0.1% to 0.25% depending on the amount. A fee of 0.25% is used at

BL3P, the marketplace of Bitonic. Third-party expenses (payment processing) are passed on separately. There is also a (limited) number of platforms that does not work with orders, but mainly operates as intermediary or exchange and brings together supply and demand. A well-known example is

LocalBitcoins.com.

It is possible to purchase Bitcoins with cash money via so-called Bitcoin ATMs. You can enter euro banknotes in the Bitcoin ATM, after which the equivalent value is deposited in your digital wallet.

There are a couple of these in the Netherlands.

Furthermore, it is possible to purchase Bitcoins against cash in person (face to face). People offer to

purchase Bitcoins against cash on LocalBitcoins.com among others. The person quotes his price and limits (minimum and maximum transaction size) that he charges for (cash) purchases and sale.

Payment in Bitcoins for goods or services

You can also get Bitcoins by being paid in Bitcoins for delivering goods or providing services in economic transactions. You then get the countervalue of your goods delivered or services rendered in

Bitcoins directly deposited in your wallet. These could, by the way, also be illegal goods and services.

If you offer goods or services through a webshop that accepts Bitcoins as an online tender, the transaction then takes places via a Payment Service Provider (PSP). Examples of a PSP include

Bitpay, Qantani Payments and Mollie.

How do you sell your Bitcoins?

You can sell Bitcoins in different ways:

• online at exchangers and exchanges; • in person (face-to-face) with a trader in cash.

When you sell to or via exchangers and exchanges, the profits will then, as a general rule, be deposited

on a bank account.

If you want to sell your Bitcoins against cash, you can do this through a trader who advertises this on

the internet. When selling Bitcoins to a trader against cash, it requires a physical meeting, where, at the

time of the transaction, the Bitcoins transfer online from one wallet to the another wallet and the

transfer of the money takes place. This poses a risk for both parties. In the event of larger transactions,

parties can take measures to ensure that the transaction is carried out as agreed to beforehand. Use of

straw men, the choice of (public) meeting points and securing the environment are examples.

5 In practice, both Bitcoin platforms as well as Bitcoin exchange offices refer to themselves as a 'Bitcoin Exchange', which

could lead to confusion whether exchange means a platform or an exchange office.

6By the end of 2015, the number was estimated at seven, see:http://www.bitcoinspot.nl/wereldwijd-zijn-er-500bitcoin-

Other ways of getting cash is indirect, where payment first takes place through a bank account, credit

card or a prepaid card, after which cash withdrawals are possible.

The value of a Bitcoin

The price of Bitcoins is established by the value attributed to Bitcoins by the traders, through supply

and demand on the exchanges. The total amount of Bitcoins that is issued is pre-determined at 21 million.

78 The value of the Bitcoin fluctuates considerably, as the figure below shows.

Figure 2 The rate of the Bitcoin from 2011 to 20169 Www.coindesk.comshows the daily closing rates of the Bitcoins in dollars.10 Dutch laws and regulations with respect to Bitcoins Bitcoins are virtual currency with which you can pay worldwide. Dutch case law does not consider Bitcoins to be money, but a means of exchange, such as silver and gold.

11 In the Netherlands, the

Bitcoin, therefore, is not a legal tender.

12 Bitcoin, namely does not fall within the definition of

(electronic) money within the meaning of the Financial Supervision Act. Virtual currency, such as the

Bitcoin, does not fall within the scope of financial supervision legislation. 13

7This number will be reached by mid 2140. Until then, the Bitcoins will we issued in a phased manner. The vast majority of

Bitcoins will already be in circulation by 2033. Source: B.H.M. Custers, J.J. Oerlemans and R.L.D. Pool 'Ransomware,

cryptoware en het witwassen van losgeld in Bitcoins' ['Ransomware, cryptoware and money laundering ransom money in

Bitcoins', Strafblad [magazine] 2016 (2), 15.

8The total value of all Bitcoins added together is about 10.8 billion dollars (9.6 billion euro), as stated by the Financieel

Dagblad [Dutch Financial Times], see

http://fd.nl/beurs/1155828/bitcoin-bereikt-marktwaarde-van-10-mrd. This is no record.

The coin reached its first major peak at the end of 2013. The price of one Bitcoin then went up by more than 1,100 dollars

and as a whole reached a market value of nearly 14 billion dollars, see

9 http://www.spectator.co.uk/2016/03/is-bitcoin-a-safe-haven-against-mainstream-money-mayhem/.

10 To convert to euros, you can make use of the 'Historical Exchange Rates' (http://www.excelclout.com/historical-exchange-

rates-in-excel/).

11 District Court Overijssel 14 May 2014, ECLI: ECLI:NL:RBOVE:2014:2667. The Dutch Court ruled that the "wallet' in

which Bitcoins are being kept does not differ much from an ordinary bank account. However, this is not managed by a bank

for example, but by the owner himself, as such these are not scriptural funds.

12 Bitcoins do not appear physically. For this reason, the Bitcoins cannot be considered as cash, money in the physical form

of currency. Nor are Bitcoins electronic money as there is no claim on an issuing entity.

13 Letter from the Minister of Finance addressed to the President of the House of Commons dated 19 December 2013,

reference: FM/20131939 U.

You have to indicate the value of your Bitcoins in Box 3 of the income tax return.14 When you trade in

Bitcoins on a commercial basis, like Bitcoin traders, you must account for the merits in your tax return. The European Court of Justice has ruled that Bitcoins may be traded exempt from VAT. 15 Transactions in goods and services that are paid for in Bitcoins, however, are not exempt from VAT.

Some advantages and disadvantages of the Bitcoin

Conducting a Bitcoin payment is practically free of charge and very quick. Each Bitcoin transaction has a unique code, which is not linked to an identity or name giving you thus anonymity. Moreover,

there are no borders within the network, so it does not matter where the payer and receiver are located.

This is different in the mainstream payments system in which entrepreneurs owe transaction fees for making (the process of) the payments as well for every international transfer and where bank account numbers with identifying information are linked to the transactions.

Reliability in legal tenders is achieved by the fact that the issue of money is done by a central bank, by

supervision on the banks and the trust put in a bank due to supervision by the central bank (in the Netherlands this is De Nederlandsche Bank [The Dutch Bank] and for example the deposit guarantee

scheme. This is not the case for Bitcoins. There is no authority that can offer suchlike reliance. If an

online service for Bitcoin wallets goes bankrupt or gets hacked, the customers will have lost their

Bitcoins.

16 The value of the Bitcoin strongly fluctuates, partly due to the relatively small scale of the

coin, scandals and the (associated) trust of consumers. In this sense, the Bitcoin can be considered a

risky investment. Sending Bitcoins is an irreversible process; when you have transferred too much or to a wrong address, this cannot be undone. 17

Bitcoin and the anonymity

How anonymous is Bitcoin?

As described above, you make use of a wallet and one or more Bitcoin addresses when carrying out transactions. A wallet and an address are not linked to a name. To that extent you are trading as an anonymous person.

However, all Bitcoin transactions are visible and in principle traceable. All transactions that take place

in the Bitcoin network, are namely stored in the so-called Blockchain. This public ledger stores, among other things, when a transaction has taken place, which Bitcoin addresses have been involved in this and the amount of the transaction. 14

15 http://fd.nl/ondernemen/1124130/bitcoin-is-een-valuta-en-dus-vrij-van-btw.

16 Annual Report of the Nederlandse Bank [Dutch Bank] 2013, p. 84.

17 B.H.M. Custers, J.J. Oerlemans and R.L.D. Pool 'Ransomware, cryptoware en het witwassen van losgeld in Bitcoins'

['Ransomware, cryptoware and money laundering ransom money in Bitcoins', Strafblad [magazine] 2016 (2), 15.

Figure 3 Screenshot of the Blockchain with actual Bitcoin transactions taking place worldwide

In the search screen on http://blockchain.info in the lower right corner of figure 3, you can enter a

Bitcoin address. This then gives you an overview of the transactions that were done with that address.

The Bitcoins are traceable via the Blockchain up and till the moment they once originated.

Via the website

http://walletexplore.com, you can see the transactions that have been done with

specific wallets. You can enter a Bitcoin address in the search field of this website. A message will

then appear stating that this Bitcoin address is part of a certain wallet. To which you will get to see all

the transactions that are done with that wallet. Via the button 'show wallet addresses' all Bitcoin addresses connected to this wallet become visible. Figure 4 Screen shot of WalletExplorer which wallet is linked to a certain transaction The above-mentioned tools, available through the internet, can therefore help you find out which transactions were done with the use of which Bitcoin address. In addition, you can find out which

Bitcoin addresses belong to which wallet.

Possible breaches of the anonymity of Bitcoin.

A wallet and a Bitcoin address are not linked to a name of a natural person and thus provide anonymity. However, you have to download a wallet, purchase your Bitcoins, transactions are being

initiated and registered via the internet and at some point you would be wanting to sell Bitcoins. In this

part, traces can be left behind that eventually lead to the identity of the person behind the wallet, the

addresses, the transactions and the cash flows. You need a bank account to buy and sell Bitcoins through Bitcoin exchange offices or Bitcoin

exchanges. Money is transferred from this account to the exchange office or the exchange in return for

Bitcoins. When selling the Bitcoins, the exchange office or the exchange transfers the countervalue to

the bank account. The banking institution also has the identity of the account holder and moreover all

(other) financial transactions. Combine the Bitcoin transactions and the financial transactions of the

bank account and you will get a fairly good view of the length and the scope of the trade by the person

concerned. The banking institution also has the duty to report unusual transactions.

18 Supervisor De

Nederlandsche Bank (DNB) has warned banks and payment institutions in 2014 for integrity risks in

virtual currency. DNB qualifies the present virtual currencies as products with a very high risk profile

and, as such, an attractive currency as a link in a money laundering process.

Increasing anonymity

On internet websites you are advised to hide your IP address by making use of the Tor network. 19 By making use of the Tor network, the IP address of the user is rendered anonymous, making it not possible for the identity and the location of the person to be traced. Users of the Tor network can

therefore surf the internet anonymously, the IP address is not logged. Your Bitcoin transactions cannot

then be linked to your IP address and therefore not linked to you. Also the use of public Wi-Fi networks or the use of a VPN service provider

20 constitutes anonymity on the internet.

You can also generate more anonymity by making use of:

· a third party (straw man)

· a Bitcoin mixer

· Coin-Join

· a Bitcoin trader

The straw man

One or several third parties ('straw men') may be used for opening bank accounts, whether or not in name of those third persons or in name of a legal entity set up by those third persons (including

foundations), which are used to buy Bitcoins or to receive its countervalue in euros when the Bitcoins

are sold. Third parties can also be used to withdraw money from the account and to undertake the actual cash purchase transactions for the trader. This way a person can operate as an independent trader or a criminal organisation can change its Bitcoins without revealing his or its identity.

The Bitcoin mixer

A Bitcoin mixer pertains to online services that are called "mixing services". Bitcoins are exchanged

against other Bitcoins against a payment of a commission to the mixer. That commission is a few percent of the total amount of Bitcoins (think of 2% or 3.5%). Because of the fact that Bitcoin

transactions are kept in a public register (the Blockchain), the origin of the Bitcoins are therefore

traceable. The Bitcoin mixer ensures that tracing the transactions is being blocked. The sole purpose of

mixing services is to disguise the source of the origin of the Bitcoins. Some services, like BitLaundry,

make no secret of this objective: "Secure Launder renders your bitcoins completely untraceable, even to the most persistent forensic investigator." Mixing services often work via a Tor network, thus keeping the service provider and the customers

anonymous. It also appears that mixing services mostly operate from jurisdictions where there is little

or no judicial cooperation.

21 The mixer is constructed in such a way, that you do not get your own

18 Article 1 in conjunction with Article 16 of the Money Laundering and Terrorism Financing Act.

19Tor is short for the Onion Router, a special network that renders users anonymous. There is a browser available, the Tor

Browser, giving you access to this network. Put simply, the Tor allows you to surf anonymously, visit blocked websites and

surf to websites that end with .onion via Tor's own network. You cannot visit these websites via a regular browser. Source:

20 A VPN tunnel is set up through a VPN service in order to encrypt and render your internet traffic anonymous. As a VPN

service changes your IP address, you can then hide your geographical location or seemingly alter it.

21 B.H.M . Custers, J.J. Oerlemans and R.L.D. Pool 'Ransomware, cryptoware en het witwassen van losgeld in Bitcoins'

['Ransomware, cryptoware and money laundering ransom money in Bitcoins', Strafblad [magazine] 2016 (2), 15 under

Researchers Summit (eCRS) 17-18 September 2013, p. 1-14

Bitcoins back, not even if you put your Bitcoins through the mixer in different portions. The Bitcoins

you get back following the 'mixing', are Bitcoins originating from other persons who also make use of

this service. These will be Bitcoins with another transaction history. By using the mixer, your transaction history (in nature, size, wallets and parties) cannot be seen nor reconstructed.

22 You can,

however, see that the Bitcoins that have gone into the mixer, have in fact been in the mixer. 23

The CoinJoin

A special way of mixing is mixing based on CoinJoin. CoinJoin is a form of mixing whereby several persons collectively make one Bitcoin transaction. Preferably, the amounts that are offered are ofquotesdbs_dbs10.pdfusesText_16

[PDF] [PDF] Note The Bitcoin trader, AMLC 2016 - Anti Money Laundering Centre